IDEAS home Printed from https://ideas.repec.org/p/zbw/bofrdp/rdp2003_020.html
   My bibliography  Save this paper

Learning, inflation expectations and optimal monetary policy

Author

Listed:
  • Schaling, Eric

Abstract

In this paper we analyse disinflation policy in two environments. In the first, the central bank has perfect knowledge, in the sense that it understands and observes the process by which private sector inflation expectations are generated; in the second, the central bank has to learn the private sector inflation forecasting rule.With imperfect knowledge, results depend on the learning scheme that is employed.Here, the learning scheme we investigate is that of least-squares learning (recursive OLS) using the Kalman filter.A novel feature of a learning-based policy as against the central bank's disinflation policy under perfect knowledge is that the degree of monetary accommodation (the extent to which the central bank accommodates private sector inflation expectations) is no longer constant across the disinflation, but becomes state-dependent.This means that the central bank's behaviour changes during the disinflation as it collects more information.

Suggested Citation

  • Schaling, Eric, 2003. "Learning, inflation expectations and optimal monetary policy," Bank of Finland Research Discussion Papers 20/2003, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2003_020
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/211953/1/bof-rdp2003-020.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
    2. David Andolfatto & Scott Hendry & Kevin Moran, 2002. "Inflation Expectations and Learning about Monetary Policy," Staff Working Papers 02-30, Bank of Canada.
    3. Bertocchi, Graziella & Spagat, Michael, 1993. "Learning, experimentation, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 169-183, August.
    4. Ellison, Martin & Valla, Natacha, 2001. "Learning, uncertainty and central bank activism in an economy with strategic interactions," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 153-171, August.
    5. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    6. James B. Bullard & Eric Schaling, 2001. "New economy-new policy rules," Review, Federal Reserve Bank of St. Louis, vol. 83(May), pages 57-66.
    7. Marcet, Albert & Sargent, Thomas J, 1988. "The Fate of Systems with "Adaptive" Expectations," American Economic Review, American Economic Association, vol. 78(2), pages 168-172, May.
    8. Athanasios Orphanides & John Williams, 2004. "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," NBER Chapters, in: The Inflation-Targeting Debate, National Bureau of Economic Research, Inc.
    9. George W. Evans, 2001. "Expectations in Macroeconomics. Adaptive versus Eductive Learning," Revue Économique, Programme National Persée, vol. 52(3), pages 573-582.
    10. Wieland, Volker, 2000. "Monetary policy, parameter uncertainty and optimal learning," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 199-228, August.
    11. Marcet, Albert & Sargent, Thomas J, 1989. "Convergence of Least-Squares Learning in Environments with Hidden State Variables and Private Information," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1306-1322, December.
    12. Kiefer, Nicholas M & Nyarko, Yaw, 1989. "Optimal Control of an Unknown Linear Process with Learning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(3), pages 571-586, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Schaling, Eric & Eijffinger, Sylvester C. W. & Tesfaselassie, Mewael F., 2004. "Heterogenous information about the term structure, least-squares learning and optimal rules for inflation targeting," Bank of Finland Research Discussion Papers 23/2004, Bank of Finland.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Schaling, E., 2003. "Learning, Inflation Reduction and Optimal Monetary Policy," Other publications TiSEM 49f6213d-93d9-4a5a-85ca-5, Tilburg University, School of Economics and Management.
    2. Schaling, E., 2003. "Learning, Inflation Reduction and Optimal Monetary Policy," Discussion Paper 2003-74, Tilburg University, Center for Economic Research.
    3. Schaling, Eric, 2003. "Learning, inflation expectations and optimal monetary policy," Research Discussion Papers 20/2003, Bank of Finland.
    4. repec:zbw:bofrdp:2003_020 is not listed on IDEAS
    5. Mewael F. Tesfaselassie & Eric Schaling & Sylvester Eijffinger, 2011. "Learning about the Term Structure and Optimal Rules for Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(8), pages 1685-1706, December.
    6. Tesfaselassie, M.F. & Schaling, E., 2010. "Managing disinflation under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(12), pages 2568-2577, December.
    7. Tesfaselassie, Mewael F., 2008. "Central bank learning and monetary policy," Kiel Working Papers 1444, Kiel Institute for the World Economy (IfW Kiel).
    8. Schaling, E. & Eijffinger, S.C.W. & Tesfaselassie, M.F., 2004. "Heterogeneous Information about the Term Structure of Interest rates, Least-Squares Learning and Optimal Interest Rate Rules for Inflation Forecast Targeting," Discussion Paper 2004-14, Tilburg University, Center for Economic Research.
    9. Schaling, Eric & Eijffinger, Sylvester C. W. & Tesfaselassie, Mewael F., 2004. "Heterogenous information about the term structure, least-squares learning and optimal rules for inflation targeting," Bank of Finland Research Discussion Papers 23/2004, Bank of Finland.
    10. Schaling, Eric & Eijffinger, Sylvester & Tesfaselassie, Mewael, 2004. "Heterogenous information about the term structure, least-squares learning and optimal rules for inflation targeting," Research Discussion Papers 23/2004, Bank of Finland.
    11. Olivier Basdevant, 2003. "Learning process and rational expectations: an analysis using a small macroeconomic model for New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2003/05, Reserve Bank of New Zealand.
    12. Alberto Locarno, 2007. "Imperfect Knowledge, Adaptive Learning, and the Bias Against Activist Monetary Policies," International Journal of Central Banking, International Journal of Central Banking, vol. 3(3), pages 47-85, September.
    13. repec:zbw:bofrdp:2004_023 is not listed on IDEAS
    14. Schaling, Eric & Eijffinger, Sylvester & Tesfaselassie, Mewael F., 2004. "Heterogenous Information About the Term Structure of Interest Rates, Least-Squares Learning and Optimal Interest Rate Rules," CEPR Discussion Papers 4279, C.E.P.R. Discussion Papers.
    15. Atanas Christev, 2006. "Learning Hyperinflations," Computing in Economics and Finance 2006 475, Society for Computational Economics.
    16. Wieland, Volker, 2000. "Monetary policy, parameter uncertainty and optimal learning," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 199-228, August.
    17. Nunes, Ricardo, 2009. "Learning The Inflation Target," Macroeconomic Dynamics, Cambridge University Press, vol. 13(2), pages 167-188, April.
    18. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
    19. Gáti, Laura, 2023. "Monetary policy & anchored expectations—An endogenous gain learning model," Journal of Monetary Economics, Elsevier, vol. 140(S), pages 37-47.
    20. Giovanni Dosi & Mauro Napoletano & Andrea Roventini & Joseph E. Stiglitz & Tania Treibich, 2020. "Rational Heuristics? Expectations And Behaviors In Evolving Economies With Heterogeneous Interacting Agents," Economic Inquiry, Western Economic Association International, vol. 58(3), pages 1487-1516, July.
    21. Caleiro, António, 2007. "What Does Economics Assume About People’s Knowledge? Who knows?," EconStor Preprints 142776, ZBW - Leibniz Information Centre for Economics.
    22. Evans, David & Evans, George W. & McGough, Bruce, 2022. "The RPEs of RBCs and other DSGEs," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).

    More about this item

    Keywords

    learning; rational expectations; separation principle; Kalman filter; time-varying parameters; optimal control;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bofrdp:rdp2003_020. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/bofgvfi.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.